Russian economic history reveals two episodes of defaults on its sovereign debt obligations. The first in January 1918, after the triumph of the Bolshevik Revolution, ten months before Germany signed the armistice that put the epitaph on the First World War, when Vladimir Lenin refused to acknowledge to creditors the debt commitments of the tsarist era. The second, in 1998, six years after the extinction of the USSR when, beset by industrial reconversion and after five government crises, Moscow colluded with the West to undertake an orderly restructuring of its payments.
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If one takes into account that the 1998 default obtained the approval of the West, and the protection and credit release of aid from the multilateral institutions, the suspension of payments that the markets attribute to the Kremlin since last June 27 is the first Russian debt conflict in 104 years. The state exceeded the 30-day grace period to repay $100 million in interest due due to the Western veto on the use of greenback American in transactions of Russian origin.
The first default of Vladimir Putin’s Russia reveals the structural fissures of the economic and monetary sanctions against Moscow and the successful ruse imposed by the Central Bank of Russia and the Ministry of Finance to circumvent the financial fence with the requirement to charge in rubles for its trade flows. Russia has managed to maintain the sale of its energy services, Siberian oil and gas, which has forged the fossil-dependency of European economies for decades and which has delayed the EU’s outright ban on supplies from its eastern neighbour.
But, what consequences will this unrecognized insolvency by Moscow have on its autarkic domestic market? And in the international financial sphere?
The Russian ability to continue remunerating its international creditors through the income collected in its national currency for its commercial sales, despite having frozen half of its 640,000 million dollars hoarded in foreign currency by its central bank, began to show symptoms. of exhaustion at the end of May. Following the decision of the US Treasury Secretary, Janet Yellen, to prohibit US banks from continuing to channel debt payments. That is, to end the banking license for the collection of Russian bonds denominated in dollars, whose term expired on May 25.
Yellen’s maneuver is paradigmatic because it involves raising an insurmountable wall through which creditors renounce receiving returns on their resources as holders of Russian bonds. However, his recipe seems to have effectively pushed Russia to the default, as expressly advanced by Moody’s. It was useless for the head of Finance, Anton Siluanov, to strive to emphasize that he had given clear instructions to cover all the payment coupons of the 117 million dollars for the Western embargo on the use of transfers in greenbacks. From the G-7, at its recent summit in the German Alps, US sources boasted of the sanctioning “efficiency” of the US and its allies and the “dramatic impact” to which they were going to subject the Russian economy.
In May, the ruble fell by 23.4% against the dollar. Despite Siluanov’s clarification that debt maturities in rubles “offered the immediate option of conversion to the original currency” – that is, in dollars – creditors seem to have accepted defaults as an inescapable alternative. Meanwhile, the G-7 is weighing another flurry of retaliation that could include tariff caps on Russian energy. It would be the prohibition of the transport of oil and gas that exceed a predetermined price and that part of the tariffs obtained from goods made in Russia used to finance economic and military support for Ukraine.
An escape route in the resistance to sanctions
Analysts are beginning to question the capacity of Russia’s protective shield against sanctions, based on Europe’s urgent need to acquire gas and oil from Siberia, and Putin’s ability to handle energy as a diplomatic weapon of the first order. with which to divide the EU and manage price escalations at will. The stability of the markets is not called into question nor is a tsunami systemic by this suspension of sovereign payments -wrote an editorial of Financial Times-, but it raises the degree of concern about corporate debts due to the signs of the collapse of the ruble and the exclusion of its companies and the Russian government from international financing, as well as the deep recession in its GDP.
“The non-payment of Russian bond coupons is another symptom of the damage that has been inflicted on Russia”, specifies the FT and the “most successful result of the sanctions”, as revealed by the satisfaction that seems to reign in the Western foreign ministries before the arrears on interest on debt to creditors in their own latitudes. Unusual fact before which he recalls that, in the suspension of payments of 1998, with debt restructuring under a global concerted negotiation and initiated with great and unusual speed, several hedge funds. Few investors have speculated on Russian bonds since 2014, but there are many who have invested in assets linked to gas and oil reserves and in shares of Russian energy companies, given the “relative security” of a model of economic autarchy that It has known, until now, to weather the sanctions of the US and its allies and the few profitable niches in the markets since the beginning of the war.
For more inri, Moscow has declined to resort to sovereign immunity to solve the payments, a tool that enables states to go to court; in these cases, to the arbitration courts. But no judge seems in a position to allow investors access to Russian assets abroad or to guarantee that they can renegotiate their commitments, as can be seen with the increase in Credit Default Swaps (CDS) coverage, a formula that is common in the markets in these assumptions and that accumulates billions of dollars until a precise definition of each is produced. default, which accurately encrypts the compensation. At a time when, in parallel, the corporate debt of the Russian private sector has been catapulted, which, between bonds and loans, has acquired maturities of more than 150,000 million dollars, more than 7.5 times more than the debt slab sovereign of the country in foreign hands, half of the 40,000 million of its official bonds.
It is true that foreign currency and gold reserves are close to a trillion dollars -specifically, 922,000 million-, but the G-7 is also considering repelling the use of bullion of Russian origin as currency. And the debts are paid off. Moscow finished paying for the tsarist, historically repudiated, already in 1996, two years before its suspension of payments inherited from the Soviet Union. Like this one, without negotiating predisposition or the ace of debt restructuring up its sleeve, and with CDS increases of 80% in insurance contracts reviewed this week, according to data from S&P, which predicts that this default will be the first of a succession of them this year, admits the Credit Derivatives Determinations Committees, one of the lobby of the fund industries and investment banks, where they have not been slow to give credibility to this week’s non-payment and to claim “the declaration of Russian suspension of payments in due time”. Stock market canons specify that the cartel of default hangs on a country once 25% of its bondholders admit they haven’t received their payments.
The managing director of the IMF, Kristalina Georgieva, wanted, however, to send a reassuring message to investors, emphasizing that the Russian default will not cause any systemic relevance. Although another of the most authoritative voices of the multilateral architecture, the American economist of Cuban origin, Carmen Reinhart, chief economist of the World Bank, affirms that it will add “new risks” to a world in the midst of a change in the international order and “increasingly more convulsed” since the beginning of the war with Ukraine. Especially in emerging and developing markets, where the food, energy and other raw material crises will take root with greater virulence. Reinhart recalls that between 2010 and 2020, until the Great Pandemic, the external debt linked to exports of goods and services doubled with an exceptional decade of interest rates close to zero.
In Bloomberg Economics predict some Red numbers of 9.6% in Russia in 2022, with a fall of 15.7% in the summer period in year-on-year terms, which leads us to advance that the collateral damage of greater substance is beginning these months. Moscow’s calculations are of a contraction of between 6% and 8% of an economy accustomed to autarky since 2014 after Western retaliation for the invasion of Crimea. Even more important will be the recession in the Ukrainian GDP, with a collapse of 45% according to the World Bank.
Several European energy companies, such as Shell Oil or BP, are among the thousand firms that have abandoned the Russian market in the four months of armed conflict. But those of the oil and gas sector still remain systematically. For example, the French Total Energies has announced that it will not stop buying from Russia until the end of this year, further fueling European resistance to curb deliveries of Russian hydrocarbons, which until now account for 30% of the oil derivatives circuit. and 40% of gas. Meanwhile, Moscow threatens to stop Nord Stream I and initiate a scenario of complete interruption of energy flows to Germany.
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